Seller financing is the owner accepting part of the price as a loan to the buyer, repaid over time. It widens the pool of buyers and often gets a deal done that otherwise would not, and it also makes you a lender to somebody who now controls the business your repayment depends on. Both of those are true at once, and the terms decide which one dominates.
Why seller notes are so common in small-business sales
Most small-business purchases are financed, and where a buyer borrows from a bank the lender frequently expects the seller to carry some of the price too, on the reasoning that a seller who keeps skin in the game has told the truth about the business. In the United States a large share of these purchases involve an SBA 7(a) loan, for which the SBA states the maximum loan amount is $5 million. Seller financing business acquisition deals therefore often sit alongside bank debt rather than instead of it, which makes the priority between the two a live question.
A seller financing example: security, the seller financing interest rate and other terms that matter
A seller financing example in outline: a price of one million, with seven hundred thousand at closing and three hundred thousand as a seller note repaid monthly over five years with interest. What decides whether that note is worth its face value is the security behind it, whether it ranks behind a bank, the seller financing interest rate, whether there is a personal guarantee, and what happens on default. A note that is unsecured, subordinated and personally unguaranteed is closer to a hope than an asset, and should be priced that way when you assess the offer.
How to structure a seller financing deal
How to structure a seller financing deal, from the seller's side: take security over the assets where the senior lender permits it, ask for a personal guarantee, keep the term as short as the buyer can bear, and define default and your remedies precisely, including the right to step back in. Where a bank is involved you will likely sign a subordination agreement, and that document, not the note, determines what you can actually do if payments stop. Read it before agreeing the headline structure, because it can make enforcement rights largely theoretical.
Questions people ask about seller financing business
Why do sellers finance part of the price?
Because it widens the buyer pool and because lenders often expect it, on the reasoning that a seller keeping skin in the game has been honest about the business.
What makes a seller note safe or risky?
Security over assets, where it ranks against a bank, whether there is a personal guarantee, and the default remedies. Unsecured, subordinated and unguaranteed is closer to a hope than an asset.
What does subordination mean for a seller's note?
That a senior lender is paid first and can restrict what you do on default. The subordination agreement, not the note, determines your practical remedies, so read it before agreeing the structure.